Should Loan Originators Retract Preapproval Letters?

Someone interested in buying a home interviews a couple of Loan Originators and selects one to become preapproved with. The Loan Originator meets with the buyers and takes a complete loan application, reviews their credit and obtains all of their documentation. The LO provides the buyers with all of the possible mortgage scenarios and they select which program is best suited for their financial goals. The LO then submits that loan scenario to their processor and/or underwriter for loan approval. (With our current market, I am submitting all supporting documentation to the underwriter to sign off on before issuing a preapproval. Before August, I would review the findings with the borrower’s supporting documentation and a majority of the time, I would issue the preapproval letter without underwriter review. I’m not taking any chances).

The Buyers are very excited and write an offer on a home with a real estate agent that the LO has not worked with before. The real estate agent uses the LO’s preapproval letter when submitting the offer to the Listing Agent and Sellers. The offer is accepted.

A few days later, the Buyer emails the Loan Originator and says, “Gee thanks…we’ve decided to go with the real estate agent’s preferred loan officer

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages.

I thought it was to let the seller know that the buyer has the money and credit to buy a house. Why would that change if the LO changes? If anything, changing LO would indicate they found a better rate or lower fees, which would make them more able not less.

I can understand being disgruntled if you aren’t compensated for you work, but it just sounds like sour grapes to me if you want to make the LO the buyer eventually went with redo the work.

Maybe just charging a flat rate for pre-approvals would get that sour taste out of your mouth, Rhonda?

biliruben,
The preapproval letter should mean (by my def.) that the borrower has had their credit pulled, provided all of their income and asset documentation, completed a loan application and this has been submitted to an underwriter for review.

A prequalification means that a LO has reviewed the buyers info and has not submitted anything to underwriting.

My point is that the Seller and the Listing Agent are assuming that the buyers are obtaining financing through the lender who signed the preapproval letter.

If the buyer has changed lenders, they are not approved until they go through the process again with that lender.

As a seller, or listing agent i would like to see a letter from the LO that the buyer is actually going to use, though i don’t believe there is any contractual obligation to do so. As a selling agent, representing the buyer who has switched lenders, i’d want the same to insure my buyer can indeed get a loan through the new lender, meaning I’m not wasting my time, and would provide that to the listing agent.

Ultimately though it’s up to the lender to establish a relationship with the buyer and gain that buyers loyalty by giving outstanding service, much the same as it’s up to that buyers agent to do likewise so as not to waste their time showing homes just to have the buyer write thier offer through a different agent.

I’m not sure that I could charge a flat fee for a preapproval. In fact, I wish I could charge hourly instead of commission on transactions. Imagine how differently buyers would treat LOs if they charged more like an attorney?

Nate, the LO did have an established relationship with the buyers before the real estate agent switched them to her LO. Apparently it was not strong enough!

Okay…I fess up. I am the LO in this situation.

Meeting twice with the buyers in Bellevue and Seattle.

45 emails back and forth. Many with comments from the buyer, “Thanks! Your help and atttention has been wonderful!” to one where titled “confirmation of hiring” stating:

“I appreciate your attentiveness, please remember we are not going off a refererral or reference even, but blindly really. Therefore, I hope you find your time well spent on helping us with our questions, for we have decided and would like to proceed with you as our mortgage banker! We found that your quick response and attention to detail and market knowledge is exactly what we want in this individual. I truly feel this will be a pleasant and rewarding collaboration.”

When did things sour? After they used my preapproval letter and began working with a real estate agent I’ve never met.

Todd Duncan would say that this is an excellent opportunity to show your expertise and compete for the business. Rhonda, as you and I both know, a lot happens in the front-end of the transaction. Here’s a four call system to help you get back a portion of that business:

1- Call the borrower, ask them if they have written prrof of approval.

2- The next day, call the borrower and ask if they have a written lock confirmation.

3- The next day, call the borrower and ask if they have an appraisal scheduled.

4- The final day, ask if they are happy with the choice they made. If they are, ask for feedback about why you didn’t get the loan. Then, inform them that you respect their decision, are cancelling their pre-approval, and sent a “Notice of Loan Withdrawal” to the listing agent.

And this is one area where a transaction can fail. I’ve heard that in some cases, multiple pulling of one’s credit can damge the ability of the “shopper” to obtain an ideal mortgage.

In another similar situation, we had a transaction pulled recently where they ended up using the title escrow because……..drum roll…..”it’s just more efficient and I know them better than you”

For those that know, you’ll laugh out loud because their transaction was delayed BIG TIME. Why? The payoff of seller’s loan was with World Savings and their “efficient company” didn’t pull the payoff until just a couple days prior to closing. Ooops! ‘Nuf said.

If anyone doesn’t get it, ask your friendly LO how long it takes to get payoff’s from World Savings?

pulling a Pre-Ap. letter? careful could get yourself a lawsuit, explain: if its in writing in the contract, that if buyer changes lender, = breach of contract = seller walking with buyers Earnest Money, buyers, may sue you for their loss of Earnest Money, if they can prove that they never fired you as their LO in writing, if they have not then you may have to pay up!,

This is a no-brainer for me. As the listing agent in this scenario, my duty is to my seller, and no other. It is in the best interest of my seller that they know the buyer they have contracted with has “canceled” their relationship with their lender.

I would immediately send over a request for an updated letter of loan commitment, and monitor the situation closely with the buyer’s agent. If the buyer was wavering, I might counsel my seller to cut bait and get their home back on the market – or at least tell the buyer that it was our next move.

Consequently, if I was the buyer’s agent, and my buyer switched lenders (to or from one of the LO’s I have relationship with), I would work hard to make sure that the buyer understands that because of their decision, they need to get pre-approved again as soon as possible. I would request a new letter of loan commitment to have on file.

Would I offer the letter to the listing agent? No. As the buyer’s agent, my duty is to my buyer and no other. It is not my job to offer information about my client, but the listing agent’s job to ask the questions. If not asked, I’m not offering, because I don’t want to jeopardize my client’s interest in the home. If asked though, the listing agent would get a speedy fax of the new loan commitment letter.

Rhonda, one question I would ask, and I hope I haven’t overlooked the obvious; why is the preapproval letter no longer valid? If these buyers came back to you hours later and said “hey, we made a mistake and started talking to lender X and it turns out they couldn’t do what they said” would you not be willing to move forward? And has the fact that they talked to someone else changed their credit scire and/or other factors that your preapproval was based on such that they would no longer be preapproved? It might not be the loan they ultimately will use, but surely it’s still valid?

I agree this is not a fun part of your business, or mine, but clients to change thier mind. Sometimes it is at the suggestion of a Realtor, or a Lender, or a home builder (none are fun scenarios) but it is still up to us to create the relationship that prevents that from happening. I hope you know I’m not telling you it’s your fault, likely it isn’t, this is just something that happens to all of us and is no fun to deal with.

Nate, I know clients change their mind and I’m not going to win ‘em all. An interesting thing I’m learning from this is that clients I gain from the internet/blogging are different then those who are referred to you from a real estate agent and/or past client. I try to learn from everything–good and bad.

In this case, they have written to me to say they are now working with the other lender and they no longer want my services. Therefore, as of this moment, I’m no longer doing the loan as stated in the preapproval letter. Yes, if they came back because they changed their mind and/or scores dropped, rates increased…what ever their reasoning, they would still be approved with my company.

My thought (and I’m really not trying to be sour grapes here) is that the listing agent and seller are assuming that the transaction is proceeding with me and that the buyer is approved. Maybe this client has been working two applications this entire time and now that it’s time for a deposit for the appraisal…they chose their lender. Who knows!

This is very interesting to learn how preapproval letters are viewed by various people. Agents will gripe that they’re not worth the paper they’re written on…yet it seems that preapproval letters may be just used for the offer presentation only and that a listing agent should not assume the buyer is working with that lender?

Regarding comment number 6, a loan originator can only earn a fee if a loan is made.

The one exception in this state is if a loan fails to close, the mortgage broker can keep $300 provided the broker has a written loan commitment from a lender willing to fund the loan. The broker can then determine if the $300 will be distributed to the LO.

Anyway, does an LO have the responsibility? I don’t know if I want to touch “have to”. I’m just saying that as a seller or listing agent, I’d want to know. As a buyer or buyer’s agent, I wouldn’t offer the info unless asked. I’ll leave it up to my attorney to decide on the “have to”.

First, our Law of Agency requires us to deal honestly and in good faith.

Second, The NWMLS Financing Addendum (unless otherwise noted) requires Buyer make written application and pay the application fee, if required, for the subject Property within 5 days after mutual acceptance.

I would think that the Buyer would have to be very careful about documenting actual application, and that the Buyer’s agent needs to be on top of this, as well. If the Buyer fails to make formal application on time, then their earnest money could be at risk.

My question to Russ would be, would the original application (assuming it was done in the spirit of the contract) suffice for this clause, whether the buyer changed lenders or not? I can’t see where the contract language address a change in lenders mid stream.

My inclination would be to up front with the listing agent and communicate the change in plans, and provide new documentation of the loan as timely as possible. Everybody seems to operate better with more information, than less. If they find out the wrong way at the wrong time, it can create incredible tension and animosity.

Rhonda, I really don’t know how to answer your question. The pre-approval really isn’t an attachment to a normal P/S. I believe it is used as documenting information for the other side’s comfort. Although it sucks loosing the deal, the deal may land right back in your lap mid stream. You may be better served sitting on it (maybe Russ has a different idea here) . Which brings me to another thought…….would you issue an pre-approval without the buyer going through the formal application process?

I don’t believe that a buyer is in breach of the contract if they don’t use the lender that they started with in the preapproval process or with whom they made their initial application. The biggest issue will be whether the buyer can use the financing contingency as a means to get out of the deal if they are unable to obtain a loan from that alternative lender. If I was representing a jilted seller, I would seek to understand whether the buyer would have obtained a loan with the original lender or not. If yes, I would argue (likely successfully) that the buyer cannot use the financing contingency for return of the EM when they “could” have obtained a loan from lender #1.

I am under the impression that under the new state forms (unlike the current) the seller is supposed to be informed if anything changes with financing so wouldn’t this situation fall under that new rule and the seller would have to be notified and has the right to approve the change?

Am I misunderstanding this? (Certainly possible–my office just had the statewide forms class yesterday and it hasn’t all sunk in yet).

What gets under loan offier’s skin is simple professional courtesy from real estate agents. Great LOs like Rhonda and others probably look forward to working with new agents because it is an opportunity to shine and obtain future business. At least that is how I approach every new deal.

When I have a client that I have been working with extensively and they tell me they have identified a realtor, I leave it at that. I assume, unless demonstrated otherwise, the agent is competent. I don’t immediately tell the borrower to go calling up other agents and look for the one who will rebate a commission… after all we want to ensure our clients get the best deal. I am sure if LOs started doing this, Realtors would be a little more courteous about automatically trying to influence the buyers financing choices.

The bigger issue is that this is one of the reasons the pre-approvals are worthless. LOs do not want to be spending time doing real loan approvals that are solid as a rock only to have borrowers leave them for $50 or an .125% in rate. It takes hours to do real pre-approvals. Hours the LOs are not compensated for unless that deal closes.

Just because one LO can get a loan does not mean that another can. I had a situation very similar to what Rhonda is describing. Solid pre-approval from me, spent countless hours getting their financing together only to have the borrower go with the Realtors’ guy. A week before closing, the borrower’s loan blew up due to a weird visa issue. I knew about the visa issues and I knew that 99% of lenders wouldn’t do the deal. The agent didn’t know this, the borrower didn’t know this and I know the LO didn’t know about it. I just sat the file aside knowing they were going to have to come back.

Switching lenders mid stream over an .125% or even a .25% in some cases is just plain idiotic and irrational. It amazes me how people jeopardize their largest financial transaction over peanuts. Buying a $500,000 property and worried about saving $100 instead of who is going to get the deal done on time and properly.

Yet, Russ,
In this climate, the biggest issue for both the Seller and the listing agent when the get a contract is, “WILL THIS SALE CLOSE?”

The Buyer’s agent wants to help protect his client against unscrupulous lenders and wants to know, after working hard….”WILL THIS SALE CLOSE?”

In this business climate, financing is a huge wild card……for all parties.

A tiny difference in rate is not the issue from the perspective of most real estate agents. Too many transactions become a remake of the “Poseidon Adventure” with incompetent unethical and lazy loan officers. For me, the real estate buyers agent who is also the LO might as well come straight from Stephen King novel. I just had transaction where I tried my hardest to convince my client to pull the loan because the LO was just plain lazy…..and because he was lazy, the deal closed 4 day late. That 4 days put the Buyer and the Seller into hardship. On the other hand, there are tremendously competent LO’s that are ethical and have a superb track record of doing things the right way. The transaction always goes better when my client is in their hands.

So, what should the LO do when working with an unfamiliar buyers agent and listing agent? COMMUNICATE! Demonstrate your competence by being on the ball. Return calls as promptly as possible. If you talk to me, give me regular email updates, show by your actions that your interested in the well being of your (our) client, most likely I’ll be very happy with you. If your client is submitting an offer, consider calling the listing agent to assure them that your client is approved and your confidence in closing. These days we are about as comfortable in the transaction as we’re comfortable with the financing.

As for pre-approvals, if a LO sends a preapproval with buyer, it BETTER NOT be worthless. (Actually you’ll get a call from verifying that documentation is in and credit has been pulled).

Russ, I’m not saying I’m not going to use you (generically). As you pointed out you may be their very best option. However, show me an cause for alarm, and I am telling you that right now I have a hair trigger.

Greg, I did communicate with the real estate agent. Answered all of her calls and followed up with emails. It was really a matter of her personal preference.

Russ, I didn’t think a LO would have liability. We’re not a party to the contract. It was interesting the comment that #11 made; tath if a LO sends a letter retracting a preapproval letter to the agents and this causes the sale to fail because it’s brought to the attention of the LA and seller that the buyer may be out of contract and the buyer loses their e/m. The LO is liable.

Russ, I feel your pain! It’s the dog with two bones story where the buyer believes they’re going to get a better bone with a different LO and they just might wind up in the dog house. Again, I have no problems with borrowers selecting another LO, it’s that after a certain point, unless the LO is not performing, it’s bad form.

I don’t have time to read all 32 comments before mine, but with the new forms going into effect mid-October, I believe that if the buyer doesn’t get the approval of the seller to changing lenders (or even lending package), they’ve waived their financing contingency.

That would tend to make it more likely the buyer would have told the seller in advance.

I have seen the other side of this scenario, where the Borrower decides to come to me after another LO had done the original application and supposedly gotten an approval. Only to find that the original LO did not really have a loan approval but rather pre-qualifying status, based on credit only. The original LO had not really gotten the Borrowers financials to make a credit decision yet issued a approval letter to the Buyers.

With that being said if you are an Agent working with a Buyer who has a “real pre-approval” yet it is coming from another lender that they are not working with I would strongly suggest that you get a pre-approval from the LO they are currently working with. Most of all if you are an Agent working with a Buyer who has a pre-approval from an online Lender I would strongly suggest that you encourage the Buyers to get a second opinion. Reassure them that it will not hurt them in anyway but instead it will make sure that there are no bumps along the way of the purchase. If they do not want to do that then I would pray real hard that it closes.

It is in everyones best interest that if lending changes all interested parties should be informed and a new loan approval should be sent. The goal is to close the transaction. It always stinks when we work hard on a loan to only have someone else close the deal! It has happend to us all in this industry. If only the Borrowers knew how hard we work at times to help them reach their goal of home ownership. That goes for mortgage professionals and real estate agents.

Thanks, Susan. I’ve been on the other side too however it’s usually because the transaction is not going well with the other LO, then the agent directs them to me. It sounds like the new revisions to the P&S should resolve this situation.

I’ve always thought that the buyer could use another lender, but was obligated to fall back on the one who did the preapproval if they couldn’t close using their own. This of course being the reverse case from Rhonda’s. For instance builders often insist that the pre-approval come from their lender, because they rely on that lender’s opinion. But then the buyer can use any financing, as long as they agree to use the builder’s only if the other sources can’t close.

More often the agent’s preferred LO does the approval letter for the offer with no obligation, and the buyer is free to use whomever they choose once the offer is accepted. Again, I think they would have to get the loan from the original only if they run into trouble. In this case the agent’s preferred LO does the pre-approval as a convenience for the agent and based on volume, doesn’t expect to be paid when some don’t use them for more than the pre-approval letter.

In these times, I can see where agents might be more insistent on the buyer usuing a lender known to them. With so many not closing, I’m sure they are being more cautious. In fact I’m surprised more sellers and listing agents aren’t making approval through a certain lender mandatory, given the uncertainties in the mortgage industry.

In some areas the name of the lender is in the Finance Contingency, but ours makes no restriction in that regard. So I do not feel the contract has anything to do with the pre-approval letter unless it is made part of the contract in some way.

“Switching lenders mid stream over an .125% or even a .25% in some cases is just plain idiotic and irrational. It amazes me how people jeopardize their largest financial transaction over peanuts. Buying a $500,000 property and worried about saving $100 instead of who is going to get the deal done on time and properly.”

Ardell, I’ve never done business that way. Nor do the Realtors I work with. Not only is there a signficant time factor in doing a true preapproval (where the buyer is actually approved and all supporting documents have been provided). There is a cost factor. AUS can run about $100 on top of the credit reports which are about $18 each. Time is more valuable then that. In addition, lender that LOs submit loans to for approval track our “fall out ratios”. So if I’ve done 10 preapprovals with a specific lender to make sure the buyer is truly approved because they may have a unique circumstance (as Russ’s client) and 25% of those go somewhere else because the lender was used for the preapproval letter, and another 15% cancel out for natural reasons (never find a home), that lender is less likely to make special underwriting exceptions and, if the fall out ratio is especially high, the relationship with the lender and broker could be terminated. That’s very costly.

In my book, a prequalification is done with no expectation of working with the borrower. I would be happy to do strong prequal letter based on someone’s credit being ran and reviewing their income and assets. I would not take the next step of submitting them to underwriting or running AUS without a commitment from the buyer that we are indeed working together.

Maybe this is why preapproval letters have the reputation of not being worth the paper they’re written on. Perhaps other LOs are not fully submitting the info for underwriter approval. The Realtors that I work with KNOW they have a solid buyer when I’ve provided them a preapproval letter.

Your strategy may work for some, but not others. Preapprovals cannot be paid for. A lender could charge underwriting, credit, etc. upfront (true fees) but not for their time. And, you can ask ARDELL, should probably would not send her buyers to a LO who charged for preapprovals when the industry standard is that they’re for free.

When I told the clients that triggered me to write this post I was going to charge them for two credit reports, they indicated they won’t pay for them. Mortgage companies lose quite a bit of money over providing “free” preapprovals. In this type of market, with revenues being down, perhaps it will change to where LOs will collect for credit and underwriting upfront from the buyer.

I agree it is money, however, the risk is a lot larger than you think. I wish you could have heard the phone calls I have where a buyer is about to lose $25,000 in earnest money because they can’t get financing. It ain’t pretty.

Most LOs do not charge application fees because consumers generally do not like to pay them. Believe me, I would gladly charge for my time if consumers are willing to pay it upfront. However, many companies that do charge app fees do so because it is a revenue generator – namely large online mortgage companies who have a lot of fall out.

I find it amazing that many rate shoppers who search for an .125% on their rate like Gollum going after the precious ring in LOTR don’t apply the same rigorous save money at any cost to other parts of their lives. It is very irrational, but I understand it. You see the mortgage payment each month, so the desire is there to save money. However, the same people will spend $6.00 per day on coffee. The American consumer does not understand the difference between getting good value and being the cheapest. I would never get Lasik surgery from a Doctor advertising $99 per eye. Nor would I find the cheapest attorney, etc.

I deal mostly with high income borrowers. My most wealthy borrowers generally tend to rate shop me LESS than those with what I call new money… high salaries, but really just what I call “working wealthy”. The really successful executives/business folks don’t mind paying a little more so they don’t have to waste their time thinking about whether the deal will get done on time or without problems. They just don’t want it screwed up and if it cost a few basis points extra to know they have a dependable professional on the other end, then so be it.

The other problem is that for every lender you show me that is an .125-.250 lower, I can show you five others that can claim they are even lower.

At some point you go from getting the Deal of the Century to being the sucker of the moment.

I may get flamed for this, but I don’t really feel we were the parties at blame. We were pushed very hard by our agents to use a particular LO to get a prequal (or preapproval, I don’t remember). We were clear that we were not ready to commit to a lender and were interested in going through our credit union. We were not particularly worried about the house disappearing but the agents pushed us, and assured us we could stilll use whatever lender we wanted. We submitted the offer and went about switching to our preferred lender. We got lots of guilt trips from the original LO and our agents, whom we felt overly invested in having us use exclusively their team (we were also unimpressed with the inspector they recommended, I know, live and learn). The deal closed just fine and we got a better rate, great service, lower closing costs… the only thing that soured the process was the nasty guilt trips. I will never use or recommend those buying agents.

jkjk-no flame from me! Like you said ” the agents pushed us, and assured us we could stilll use whatever lender we wanted”. They should not have given you a guilt trip. Hopefully the LO knows that the agent tells buyers to get preapproved and then use who you want. It’s not your problem regardless. And it’s wrong of either party trying to guilt you.

It’s pretty simple: I will do whatever it takes to get the best rate, all else being equal. I have great credit, 40-50% down and will be looking for a 30-year fixed. The risk of me not closing is next to nil.

I would love for the market to be completely transparent or for brokers to have a fiduciary responsibility to act in my best interest to get me the best deal possible. Unfortunately neither is true at the present time.

So in a market who’s rules are stacked against you, the only way, assuming one can’t find a broker or LO that I trust implicitly, for a consumer to get the best deal possible is to shop.

If I could find a broker I trusted implicitly, then I would go the route you recommend, but in my last search I didn’t find such a beast.

Q: Could I and should I trust you, Rhonda Porter, implicitly to find me the best rate and fee structure so that I will pay equal or less than any other broker out there?

If you say yes, and can tell me why convincingly, it would make my next mortgage hunt much simpler. And that would be great.

biliruben, part of the problem is that when you’re shopping a lender, the rate is not guaranteed until you’re locking it in.

Yes, I feel I’m completely trustworthy. How do you know that or measure that in Loan Originators…I don’t really know. And I’m not the “slickest smooth talking salesperson”. Here is what I can tell you about me:

1) I am a correspondent lender which means we’re provided more competive rates than others since we take the risk of the loans in our credit lines.
2) this also means that I don’t have to disclose any YSP or SRP. However, I have no problem showing anyone what I’m getting paid, if anything, on the “back end” so that it is more transparent.
3) I try to provide clients with the most options (regarding products and how their loan is priced), it’s the client’s choice.
4) once we have an agreed to good faith estimate and preapproval, I’ll guarantee my closing costs (third party costs, such as title and escrow, I cannot guarantee as their fees vary and I have no control over).
5) I take great pride in the service I provide. I’m not a “fluffy” person, I am all about making sure people understand their mortgage and have their questions answered.

I’ve been in this industry for over 20 years. My business is completely referral from real estate agents, past clients and from people reading my blogs. I don’t do up calls at our office and I don’t buy leads. I have never provided an option ARM and only had prepays when the loans required them. I discouraged people from stated income loans (if they must go that route, no income verified is better so they are not lying about their income).

I’m in this biz for the long run.

You’re right. It is hard to pick the perfect beast!

Why not ask an Escrow Company (before you’re in a transaction) which Loan Originator has the soundest clients at signing. Back when I was doing escrow, we would know before the clients showed up what their mood might be! Ask Jillayne for recommendations…she knows a lot of lenders through her training, too.

I could have made this a separate post, but that would be too self promoting…just remember, you asked, biliruben!

Thanks, Rhonda. I’m sure you are a great LO, and you do right by your clients.

You didn’t really answer my question, however.

You are essentially saying you will provide me with the info I could use to compare you with other lenders, but then you’ve said that’s not how you should go about it.

All I’m asking is if I were to go with you and not look at another lender, will I pay equal or less in total, after I pay off my simple, straight-forward, fixed-rate loan in 30 years, then any of your competition?

For someone like me, that’s just about the the only thing I care about.

Informative, diligent, courteous, kind, cheerful; make the process painless and smooth. All nice.

You will NEVER get the lowest rate. It simply isn’t possible. Google “lowest rate.” The results are 88,300,000 sites. Only one person can have the lowest rate. So 88,299,000 people are published liars.

The other problem is that you won’t know if you got a great deal or were just another sucker rate shopper until you get to closing. So caveat emptor.

I am also curious if you live the rest of your life in such black & white terms? Do you patronize Starbucks or only drink instant coffee? Do you own a car? Hopefully you got the cheapest model you can find. Who needs power windows and ABS? That cost you an extra $5,000 over 10 years! Only buy your clothes at Wal-Mart? Fashion is for dweebs. Don’t use electricity… candles would probably save you quite a bit of money too. You can read just fine by candle light. Fifty bucks a month in electricity adds up to $600 per year! My point is that there is no area of your life that you can’t rationalize the Net Present Value of getting something cheaper. However, most people don’t do it because it would make their lives miserable.

I think something as important, complex, and full of potential risk as a home purchase warrants losing the Wal-Mart mentality. Nothing like stepping over dollars to pick up pennies.

Reminds me when people gloat about saving 2.5% in Realtor commissions while over paying for their property or under selling it by 10%!

You sound like those people who hit up their accountant buddies for great tax advice and instead of patronizing them, you run to H&R Block to get your taxes done.

The two types of people I see get screwed the worst in this business are those who don’t shop and those that over shop.

Thanks, Russ. biliruben, rates are a moving target, so I could never promise you the lowest rate–no lender can. Competive rates–you bet, i think I’m pretty hard to beat…but if you give my GFE to someone else, I’m sure they’ll say they’ll knock off $100.

You stated in the post that I wrote about you:

“I got a GFE from a broker recommended to me by my boss. She was smart and knowledgeable, but not particularly personable.

I also got one from a guy who worked with my Realtor who called himself a Home Mortgage Consultant (with BIG BANK Mortgage). Personable, but not that sharp.

I also called a few other brokers off the net and paper – straight APR shopping.

The first broker, the one recommended, had the best rate. Because I liked my Realtor, I gave the (Bank) guy a shot to match her rate, which he did.

He made numerous mistakes, and I was forced to go over my docs repeatedly with a fine tooth comb to make sure they were correct.

In retrospect I should have gone with the recommended broker, though perhaps not, given that she was angry with me and showed it.

In the end, however, I am going to go with the reputable person who gives me the lowest rate in an apples-to-apples comparison. A quarter point could mean 10s of thousands of dollars over the life of a loan. That’s going to trump loyalty every time, and you are fooling yourself if you think otherwise.”

You’re being true to yourself. If it works for you, stick with it.

This is a changing market. Programs and guidelines are changing constantly. The LO who promises you the lowest rate and least cost might have the experience to show for it. I would much rather work with someone who has enough experience to see my transaction through, receive a competitive rate at fair costs. That’s what I do.

Biliruben is correct. Rhonda, since a buyer can’t shop rate until he is in contract, and he can’t get into a contract without a pre-approval letter, you really can’t expect a buyer to not look at other lenders the day he gets into escrow.

That’s like saying a buyer has to use the agent he first sees a house with regardless.

jkjk is also correct. The agent who presents the offer should have absolute confidence that the buyer can close. In order to have that confidence and “sell” the buyer’s offer, especially if there are multiple offers, the lender letter from a known source, and sometimes even the listing agent’s favorite lender, can help the buyer get the house. But that is just to assure everyone that the buyer is qualified.

All of this talk about the buyer having to use the lender who produced the pre-approval letter is whacky. They can’t even shop the rate and terms until they are in escrow, so how could they possibly choose a lender before then?

The approval letter is part of the offer process, and the agents knowing the buyer can get a loan is very important to the buyer’s offer. Sometimes it can even get them a lower price. But that should not in any way obligate them to use that lender, and the buyer needs to do their due diligence as soon as the contract is signed around and then apply to a lender in the first 5 business days.

No one should even suggest that those 5 business days are not an important due diligence period for the buyer.

All the more reason to use the agent’s “preferred” lender for the pre-approval letter. It’s a service to the agent. Then after the contract is accepted, they have to win the business on their own.

An exception…a very tough one, is when the lender offers credit counseling for months and helps the buyer get their credit score up. Still the buyer isn’t obligated, but…rarely do I see a buyer not use the lender that helped them get their score up high enough to get a loan.

I’m wondering how often buyers are technically just prequalifed instead of preapproved by a lender when the LO is producing a preapproval letter.

I’m upfront with buyers of what I will do before we are committed to working together and in the case of the client that prompted this post, they actually did commit to working with me (see comment 7). The agents I work with are upfront with me and let me know if I’m dealing with a shopper and what their expectations are.

The reason they left, after securing the property with my preapproval letter (which required me to drop everything and make them a priority) was their realtor steering them to her preferred lender.

Would you like to drive buyers around in your car for months to have them write up a house with a discount broker to save a few bucks? I guess it’s their right to work with who they want to.

I don’t work with agents who use me for preapproval letters. I can spit out prequal letters no problem. Agents who refer their clients to me do so not for rate or a quick preapproval letter, it’s for the service and long term commitment I provide my clients. My relationship with my clients goes on beyond closing. I dont’ expect to get all of the clients that I issue preapproval letters on. However, if I notice that I’m doing a lot of fruitless preapproval letters for a certain agent, we may not work out well together or their clients may have to pay for a credit report and u/w fees upfront, as biliruben suggests he’d be happy to do.

I will do the post that Jillayne suggested on prequal vs. preapproval next. I used to teach classes on this way back when to MacPherson’s Real Estate…so this will be fun!

Ardell, you’ve mentioned having transactions blow up at closing…I don’t know if you were referencing what’s happend to you recently or not…my preapproval letters mean that my clients are approved. There’s no blow up at closing unless the client has had something happen to them (or they done something) like loss of employment, major new debt…which knock on wood, has maybe happened twice in over 7 years. I do a ton of work upfront to assure a solid transaction before I’ll sign my name to a preapproval letter. It means something to me.

Your post says this “after the agreed upon time to apply for financing expires.”

That does not mean the pre-approval letter. That means the timeframe within which the buyer has to apply for the mortgage AFTER the contract is “signed around”. Usually 5 days. Even then, it’s almost unconstitutional and I doubt it could be enforced. It’s like telling the buyer he has to say “Seller May I?”.

I’m working with an assumption that we all fully understand the business of mortgage lending is a for-profit business. No lender will be originating anyone’s loan for free, or giving out zero interest loans.

The government system that regulates mortgage lending is designed to encourage the consumer to shop for the best rates and fees.

Lenders (banker, broker, etc) MUST provide the consumer with a Good Faith Estimate and a Truth-in-Lending disclosure form within 3 days of the application date because our government believed (at the time the laws were written, and we’re talking about the 1970s) that it was in the best interests of the consumer to SHOP for a good deal. Shopping has the added effect of helping to keep the homebuyer’s costs down via free market competition.

biliruben asks:

“Q: Could I and should I trust you, Rhonda Porter, implicitly to find me the best rate and fee structure so that I will pay equal or less than any other broker out there?”

Now, for biliruben and ANY CONSUMER SHOPPING for a lender based solely on obtaining the lowest rates and fees, I recommend the following:

1) Consider not wasting your time with a bank. Why? Banks have a plethora of customers coming into their retail branches and aren’t too terribly motivated to slash their rates and fees for “you.” The world does not revolve around you at a bank. The sooner you get over this, the better.

2) Mortgage brokers are constantly testifying before congress these days on how “mortgage brokers can shop for the consumer.” Perfect. IF this is true, then here’s your plan:

I recommend selecting a loan originator who works for a mortgage broker and setting the expectations up front. Here they are:

The LO will find the lowest rates and fees.
The LO will guarantee, in writing, with a signature, that these are the lowest rates and fees available from any lender.
The LO will further guarantee that if the rates and fees fall lower than what is shown on the original Good Faith Estimate, that the LO will lower the rates and fees to whatever is the best available at closing time.

On that form it will be important to determine what the words “best available” mean. Best available from the lender that you’re pre-approved with? Best available from any of the 5 lenders that the broker is approved with? Best available out of ANY lender’s current product offering (including lenders that the broker is NOT approved to do business with?)

Also, make sure the word “fees” is defined as ALL fees, even third party fees that the LO has no control over. Why? Because if an unethical LO wants to get your deal, he/she will make those third party fees look REALLY LOW in order to make you think you’re getting the lowest fees, and then can later come back and say “well, I had no control over those fees.”

Biliruben, or any homebuyer who is going to try this tactic, you must also obtain the signature of the LO’s BROKER on that form.

I predict that no mortgage broker will ever give you the document you are seeking. Why? Because it would be nearly impossible to meet those expectations without the broker and LO actually LOSING money on that transaction due to the added legal liability, added cost of legal counsel’s review of the agreement, and the inordinate amount of time it would take to rate and fee watch.

Consumers who shop by trying to find the lowest rates and/or fees are a very easy mark for unethical loan originators. They will lowball everything on your estimates and then at closing, you will see a completely different set of fees. Sure, you might get the lowest rate, but your fees will be higher and you’ll be backed up against a closing deadline and there you go. Please bend over and pick up the soap.

Biliruben and other mortgage shoppers, consider setting your sights on the process as well as the bottom line.

For example, fairness and honesty, competitive rates and fees, depth of knowledge, history of responsible, reliable performance, and a wide variety of mortgage products are all important.

The websites that promise the lowest rates and fees are actually lead generation websites. The mortgage lender that bids the lowest will pass on the cost of your lead to YOU in the form of handing you an incompetent loan originator.

Now back to what biliruben is looking for.

Mortgage industry: biliruben’s decision to shop for a lender based on the lowest rates and fees are a direct reflection on how today’s consumers view mortgage lenders.

It doesn’t matter if you’re a great LO. It’s the whole industry that is viewed in this way. If you want to stay in business in 2008, I recomment figuring out a way to guarantee the lowest rates and fees and make a profit, and you’ll have bilirubens lining up outside your door, because consumers who have never met you do not trust you to be honest, fair, reliable, etc.

If you have plenty of business, then let the bilirubens go try and find that mysterious, magical loan with the lowest rates and fees. Wherever it is, it’s probably sitting right next to a diet pill that will take off those last 10 pounds, the fountain of youth, and the perfect lover.

The only way you would do a lot of pre-approval letters and not get the loan is if your products are not competitive. Are you suggesting that a buyer should be locked into a less than desirable loan when they can easily get one that is better for them?

I am doing one now where I am running two lenders side by side because it will be a difficult property to finance and appraise. I’ve only done that a couple of times, but sometimes it’s necessary. The property has been in escrow for months and much has changed since the original pre-approval was issued, as you well know.

I have not had a client whose loan blew up at closing. Though I have been involved with assisting other agents with snafus at the end. Clearly there are no guarantees for many buyers right now. Not everyone who can get a loan can get a pre-approval. That hasn’t changed in the 17 years I have been in this business.

Does FHA do pre-approvals? They didn’t used to. You can get a green light, but I don’t think they produce written pre-approvals before the buyer has a contract in place.

If the buyer cannot lock the rate before they have a contract, they cannot choose a lender before they have a contract. It’s that simple.

I do not believe any buyer can be forced to use a certain agent either. People do have rights. I do think they need a reason, but if they can’t stand their agent, they shouldn’t be forced to proceed with their most important asset with someone they don’t trust or can’t stand to be in the same room with. Who can disagree with that?

Ardell, yes I can write preapproval letters for FHA or VA purchases. We have always provided FHA and VA approvals. We are a HUD Endorsed Mortgagee.

Again, I’m thinking we might be confusing prequals with preapprovals. I’ll write prequalification letters stating credit and income has been checked and they “qualify…” until the cows come home. I will not use my underwriters time and efforts to produce and validate findings for preapproval letters unless the buyer has committed to working with me. By this time, they have interviewed LOs and determined who they want to work with.

The lowest rate, I cannot guarantee. What if I locked billiruben in at 6.125% today and tomorrow the rate dips for an hour to 6.00%? I just broke my guarnantee to him. Rates change constantly (throughout the day), they are a moving target. If we have significant rate changes during a transaction, I will break a lock for a client to get them the lower rate. I cannot do this often because it does burn investors and impacts our “fall out ratios” as I mentioned above.

I have strong relationships with the lenders we work with which can really help if you’re in a bind or need something quickly. I’m not going to burn that relationship and I’m not going to burn my underwriters.

“If you have plenty of business, then let the bilirubens go try and find that mysterious, magical loan with the lowest rates and fees. Wherever it is, it’s probably sitting right next to a diet pill that will take off those last 10 pounds, the fountain of youth, and the perfect lover.”

the bilirubens, and I know there’s a lot of you out there, wouldn’t be happy with their LO even if somehow they did get the lowest rate at the lowest fees possible. They will always wonder how they’re getting screwed and who’s offering a lower rate somewhere else.

I perform better when my clients (agents included) trust me and I can trust them. If there’s not trust, it’s not going to work with me. I know trust is earned…this is probably why my business is referral.

Clients come to me all ready with some degree of trust because their friend or family member had a good experience with the mortgage services I provided.

Real estate agents who refer business to me do so because they know I’m being completely straight, I don’t blow smoke or kiss a$$. They also don’t run double aps with me against another lender. It’s back to the trust issue. I’ve worked with most of my agents since I was in title insurance, so they’ve known me up to 20 years. They know my ethics and how dedicated I am.

Yes, many agents (and I would include myself in this) want to refer clients to their LO’s of choice. Why? Because we know they are competitive….and understand their service levels. The transaction goes better for everyone involved.

The client ABSOLUTELY as the right to shop…..and sometimes they come in to the relationship their own LO.

The track record from years of experiences and 100’s of transactions show that these unknowns range from “outstanding”, to “dishonest”

When the deal blows, because of the LO, it’s as messy as it gets.

For the quest of the lowest rates, many have gone the on-line route. Frankly, I can’t remember many on-line lending experiences with clients that have turned out well.

That being said, we can counsel and educate based on our experiences. However, the consumer HAS THE RIGHT to make their choice on who to go with for their money.

In the end, however, common sense must prevail. It’s been my experience when agents become too rigid on any issue……loans, escrow, title, or other contract details, these agents often do it out of ego, not what is best for a client.

When I’m working with an agent on the other side who exhibits blind rigid behavior, I often refer to them as the “Sales prevention team”.

To find out what is best for a client, we have to listen. If it makes sense for the client….it should be so.

Greg, I completely agree. I feel everything should be the clients choice. They should be receiving as much information as possible upfront to make the best educated decision on their home purchase and financing.

In your opinion, is there a point where the buyer should be committed to the lender (assuming the lender is preforming)?

Once your buyer is “preapproved”, do you assume they’re working with that LO?

Can you list what to look for in an LO? I am a first time homebuyer and after reading this post it is showing me that a good LO is a very important factor. Wow, and I thought finding a home at a reasonable price that I could make payments for, and a real-estate agent to process the paperwork was all that was needed. I shop at Nordstrom, but if Macy’s has the same thing on sale I’ll buy it there, or to top it off, if I find the same thing at Value Village nearly new, Yahoo! Really, the consumer has the responsibility for getting the best deal or leaves it to a personal shopper and pay the price! So, what important steps should I look for in an LO and what are my obligations?

You’re absolutely correct, it is the consumers responsibility to select the right person to work with them and to learn as much about the process as possible. The more you know, the less odds you have in being taken advantage of. The post I referred you to is older…I’m probably due to create an updated on!

It doesn’t matter what we “assume” Rhonda. Until the Finance Contingency has a line naming the lender to be used, the buyer applies for their loan within the first 5 days of being in contract, per the Finance Contingency. Not when they get their pre-approval.

Regarding the new wording about changing lender, the lender is not the LO and many LOs change the lender and resubmit the package to a different lender during escrow all the time. Most of the time without the buyer’s consent let alone the seller’s approval.

Do you read that to mean the loan broker or the actual “lender”? Most times the LO doesn’t know which lender they are going to use during that timeframe, the first 5 days of the contract.

“For purposes of this Addendum, “lender” means the party funding the loan”.

As a correspondent lender, Mortgage Master is funding 90% of the loans I originate in our credit line. We are not selling the loans until after closing. We are the funder.

If I were just a broker and not correspondent, then does that mean I would be treated differently? Brokers are not funding their loans. So if a Loan Originator starts off with a preapproval they’ve obtained from Wells Fargo and then they find better pricing at Chase during the transaction so they move the transaction to Chase, does this mean they need to notify the listing agent if all the other terms have remained unchanged?

Regulators have defined the term “lender” as the entity with the ability to fund the loan.

This would mean that making a loan application to a broker is not making a application to a lender. This is not new. I believe we have state case law on this. I think the year was 1999.

In order for a homebuyer to meet the financing contingency of making an application, that broker must submit the application to a lender within that time frame.

So Rhonda, if your brokerage has a correspondent credit line with Wells and Chase, you’re fine. If the borrower’s transaction needs to move to a different lender, meaning, a brokerage relationship instead of a correspondent relationship, I would take that to mean that yes, an LO has a duty to notify the agents.

The above comment is not meant to provide legal advice. If anyone reading this post must have a legal opinion, consult your favorite real estate attorney.

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[…] 4, 2007 Switching Boats Mid-Stream Posted by Jason Mook under Home Buyer , Home Seller , Lending , Mortgage Rhonda Porter atRain City Guide recently posted: Should the Loan Originator inform the Listing Agent that the Buyer has decided to find financing elsewhere? The Listing Agent and the Seller considered the preapproval letter when they selected that offer. Now “that lender